Thursday, September 29, 2005

Two opposing views on newspapers' bottom line

Grade the News has recently published two educated opinions about the state of the newspaper, the primary focus being on the problem of the bottom line. Lou Alexander, former director of the San Jose Mercury News' advertising department, highlights "three prominent misconceptions about newspapers" of which the first discusses newspaper profits:

Myth - Newspapers should cut profit demand: Alexander argues that the reality of the market does not allow newspapers to cut their above-average profit margins. Using the example of Knight Ridder, he argues that by cutting profits and piping that money back into their journalism, newspaper company stocks would be greatly devalued resulting in two scenarios:

1. the more positive scenario is that "one of the other cash-rich public companies would start buying KRI stock with the intent of taking over the company. To another media company some of the KRI newspapers are worth having in their own right. They are profitable and could be clustered with existing parts of the company executing the takeover. There would be considerable savings to be had by eliminating most of the KRI corporate staff. Some of the newspapers could be sold or traded to other companies to create new clusters."

2. or even worse; "Knight Ridder could be taken over by an investment consortium, which has profit as its only goal. It would generate extraordinary profit by breaking up the company, selling off the various newspaper and electronic media companies one by one."

Stephen R. Lacy, a respected media economics professor, counters Alexander's argument by saying that "Perhaps the real myth is that public companies will continue to make 20% to 25% profit margins 25 years from now." He describes two possible bottom line situations contrary to Alexander's:

1. "A commitment to profit margins in the 15% to 20% range and a willingness to invest in journalism to maintain readership. (This means readership of print and electronic news.) If newspapers maintain newsroom investment, they should dominate the local Internet market. This will require that investors adjust their expectations for public newspaper companies, but the fragmentation of advertising market will push that adjustment on investors eventually, whether they like it or not. I call this the long-term scenario."

2. The second scenario involves the continued cutting of newsroom resources (as well as other newspaper resources) to preserve high margins with the corresponding loss of circulation. The current managers will maintain their control, but the movement of readers away will open up opportunity for weekly newspapers, Internet news sites and even local cable channels to serve their former readers and compete for advertising.

Despite this bottom line argument, both seem to agree that content matters when it comes to circulation and conversely, profit.

Alexander closes with two suggestions:

1. The newsrooms of America need to make sure they are purer than pure. The world is full of smart, well-educated, well-read media consumers these days. These folks are aware of the scandals of the last few years.

2. Forget about gimmicks and focus on compelling content.

Lacy says, "Circulation is related to content. Circulation is not exclusively related to content, but most research supports some relationship.

Does these conclusions mean that by continuing to produce quality journalism, falling newspaper circulations will eventually turn around? If keeping high margins means cutting newsroom staff, can newspapers continue to produce the quality needed to sell their papers?